By Tensing Rodrigues
Last week and also in the past, we have dwelt over the woes that have besieged the developed economies of Europe and US. It is wrong to suppose that all these are of cyclical nature; a frequent comparison with the Great Depression of 1930s seems to imply that; but, probably, nothing could be farther from truth.
Similarly, it would be wrong to blame the reckless credit expansion as the root cause of the woes of US and Europe. Profligacy did exacerbate the problem to a large extent, and hasten the day of reckoning; but the roots of the problem definitely lie elsewhere. It is becoming increasingly evident now that the very dynamics of global exchange in a changing technological scenario have set in motion structural changes in global balance of economic power that neither time nor tide can hold back.
Every dog has its day, they say; history of humankind then becomes merely a story of the passing of the bone from dog to dog. A slew of reports by global consulting firms McKinsey& Company and Deloitte Touche Tohmatsu seek to record this transformation of the economic landscape of the world.
McKinsey’s report titled ‘Globalisation’s Critical Imbalances’, released two months back summarises the driving forces of this transformation in the following words: To some extent, the rebalancing of global economic activity from developed to emerging markets simply reflects economic laws of gravity. The real integration of the world’s economy begins with factors of production. Of those, commodities, capital, and labour are the most important for understanding our structural economic issues. The test of whether a market has fully formed is whether all customers get the same items at the same price, allowing for transaction and transportation costs. Such market conditions have long existed at a global level for natural commodities, manufactured goods, freely traded foreign exchange and most instruments traded in the capital market. It does not exist for labour, however - which is the fundamental structural issue the global economy faces.
Until recently, the differences in prices of labour across countries were hard to capture because high-quality, highly productive labour was scarce in emerging markets. In the past decade, however, it has become relatively easy for companies to capture such opportunities, thanks to the combination of urbanisation, education, infrastructure investments, new technology, spread of advanced production techniques and evolution of digital standards. Even today, the cost of labour in China or India is still only a fraction (often less than a third) of the equivalent labour in the developed world. Moreover, the productivity of Chinese and Indian labour is rising rapidly and, in specialised areas (such as high-tech assembly in China or software development in India), may equal or exceed the productivity of workers in wealthier nations.
The structural issue facing developed world nations is that the amount of high-quality, high-productivity labour that is being mobilised in rapidly developing economies like Brazil, China and India, is displacing jobs that would otherwise be in Europe, Japan and the US. This is the underlying reason why unemployment in the latter economies is becoming more structural rather than cyclical, and may get worse over time, no matter how much public stimulus is provided.
It is no wonder, therefore, that the job losses of the latest recession look quite different from those of past recessions; the bottom of the trough does not seem to come in sight even after two years and half.
